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Chapter 2 The Assets and Liabilities Held by Low-Income Families John Karl Scholz and Ananth Seshadri T here are many reasons to be interested in the assets and liabilities held by American households. Net worth, the difference between assets and liabilities , can be used to maintain living standards when families are hit with adverse employment, income, or health shocks. These resources may provide the critical buffer that allows a poor family to fix a broken car and remain employed, find help in caring for a sick child, or move out of a dangerous neighborhood. Net worth may allow families to take advantage of investment opportunities, such as pursuing further education. Many families need to accumulate net worth outside of Social Security and employer-provided pensions to maintain living standards in retirement. Finally, wealth may expand opportunities: significant wealth almost surely provides political access for those who seek it, and wealth may also buy access to social networks that improve employment or the well-being of children. The motives for wealth accumulation that are often the focus of attention for high-income households—namely, saving for retirement or sending children to college—may have less relevance for low- and moderate-income households. Social Security replaces a larger percentage of average lifetime earnings for low- and moderate-income households than it does for high-income households. Similarly, college financial aid, particularly through Pell grants, is targeted at children from low-income households. At the same time, low- and moderate-income households are generally much more susceptible to adverse economic shocks, such as unemployment or illness, than those with greater resources. Wealth may provide a crucial buffer that allows those facing economic shocks to keep a job or treat a problem before it has a major effect on the life course. Over the past two decades, some striking changes have had important effects on low-income families. AFDC (Aid to Families with Dependent Children) was abolished. The broader safety net became more work-oriented. Rates of female labor force participation steadily increased, as did incarceration rates, particularly for men with low levels of education. The fraction of children living in a house- / 25 hold with two married parents was 85 percent in 1970. By 2006 the corresponding figure was only 67 percent (Child Trends Data Bank 2007). Lastly, there have been widely noted changes (or perceptions of changes) in economic insecurity (see, for example, Gosselin 2004). Financial markets changed as well. Equity market returns were strong, particularly in the 1990s. Mortgage access in low-income communities expanded as innovations in financial products, including so-called subprime mortgages, became available. A number of public policy initiatives were also taken to increase wealth and increase banking for low-income families. The Assets for Independence Act of 1998, for example, authorized the development of individual development account (IDA) demonstration programs. Efforts were made to extend banking services more broadly (see, for example, U.S. Senate Banking Committee 2002). The chapters in this volume discuss many other developments. This chapter establishes a set of stylized facts about patterns of net worth held by low-income American families and individuals and discusses how these facts changed over time as the economy and financial markets changed (for a nice related contribution, see Carney and Gale 2001). The core of the chapter, given our interest in low-income families, is based on a series of appendix tables that show how major components of assets and liabilities evolved between 1962 and 2004 based on data from the Survey of Consumer Finances (SCF), which is widely viewed as the “gold standard” of wealth data for the United States. We start by examining net worth and presenting data on wealth holdings and patterns of wealth inequality from 1962 to 2004. We also focus on homeownership, since housing remains by far the most important asset held in household portfolios, and on financial assets, the liquidity of which allows households to draw on them when confronted by adverse economic shocks. We provide information on credit card debt, bankruptcy, and access to credit, which are all measures of low-income families’ access to credit markets and the vulnerabilities they may face. Our intention in this portion of the chapter is to establish a set of facts that provide a foundation for many of the other chapters in this volume. We close with a discussion of three issues that have received somewhat less attention in research that focuses on the net worth and portfolios of low...


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